Knightscope Stock: The Symbol You’re Looking For is KSCP
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Imagine living in a country where organized groups of thieves commit robberies with impunity, dashing into stores wheeling guns and crowbars, threatening customers, and making off with cartloads of loot. If you think such brazen lawlessness only occurs in third-world countries, think again. We did a double take after seeing the below article from Bloomberg yesterday about how (checks notes) Best Buy (BBY) is having their margins squeezed because so much theft is happening in… America?
That’s right. From the horse’s mouth:
Burglaries range from dozens of people rushing into stores and grabbing merchandise to theft by smaller groups, some of them brandishing guns or crowbars, Chief Executive Officer Corie Barry told reporters Tuesday. Northern California has been a particular trouble spot, she said, but Best Buy has seen pockets of criminal activity all over the country.
Credit: Bloomberg
The article goes on to talk about how Best Buy employees are being traumatized by the violence, but not in the way you might think. A Best Buy employee was actually fired for trying to stop a shoplifter. Investors reacted accordingly, sending shares of Best Buy tumbling -12% today. If there was ever a need for automated security solutions, now would be that time. Today, we’re going to talk about a company that’s building fully autonomous security robots – Knightscope.
About Knightscope Stock
We first covered Knightscope and its autonomous security capabilities in a 2017 article on “7 Security Robots “Complementing” Security Guards.” The following year, Knightscope started funding their business using Regulation A+ equity crowdfunding, something we’ve warned investors about in the past. Here’s what we said in our last piece:
The company is planning to streamline their sales process and overall costs to achieve scalable growth and reach profitability as soon as possible instead of looking for more funding. They haven’t explained how they will do this though, and with their current ratio of revenue to operating costs the model is unsustainable.
Credit: Nanalyze
After raising $25 million from crowdfunding, Knightscope said they weren’t planning to look for more funding. That didn’t last long. As of this past spring, the company had raised a total of $64,609,296 using equity crowdfunding.
Now, they’re looking to raise more.
Without additional equity fundraising, typically and historically conducted on a rolling close basis, or debt financing, the Company will not be solvent after the second quarter of 2022.
Credit: Knightscope SEC Filing document
This is where you need to pay close attention to what’s happening as it can be a bit confusing. They’re doing another Reg A+ offering – this time targeting a cool $40 million – but the intent is for that to lead into an initial public offering on Nasdaq.
Knightscope, Inc. seeks to raise up to $40 million under Regulation A+ of the JOBS Act and then, in succession and subject to NASDAQ requirements, be listed on the NASDAQ under the ticker “KSCP”.
Credit: Knightscope
The Knightscope IPO
What Knightscope now plans to do is conduct an initial public offering (IPO) using Reg A+ as the mechanism. The investor page talks about how the company is allowing existing investors – and of course all retail investors – to indicate interest in the offering after which time they’ll look to list shares on Nasdaq. Imagine our surprise when the Chairman and CEO of the company himself was taking chats on their website from interested investors. He parroted the usual banter about how nothing is guaranteed and that we’re all going to stick it to the man – Main Street first, Wall Street second.
For existing investors this is a big deal. The biggest reason we don’t get involved in equity crowdfunding is because shares you purchase are worthless without a market to trade them on. If Knightscope shares become publicly traded, then all those 28,000 investors who funded the company can exit their positions if they so choose. But for prospective investors, it’s cut and dry. There is no way a risk-averse investor would participate in a Reg A+ offering unless they were guaranteed that the shares would have liquidity. Consequently, we’re sitting this one out. For those who may want to have a flutter on some shares of KSCP, let’s see what you’re getting into.
The Knightscope Thesis
The thesis behind an autonomous security robot doesn’t need much explanation. It’s something we covered in a 2018 piece titled Robot Security Guards from Knightscope. Fully autonomous security robots can replace human security guards and do the job cheaper and better. With law enforcement officers coming under increased pressure from a small fraction of the public, autonomous robots could provide some additional support for companies like Best Buy whose margins are under pressure from the scum of the earth. But putting some video cameras and LiDAR sensors on a mall cop robot isn’t enough. You then need to sell the solution and prove product-market fit.
Knightscope has built Autonomous Security Robots (ASRs) that they provide under an “as a service” business model. Depending on the ASR model and/or selected offering package, Knightscope recognizes recurring monthly revenues ranging between $3,300 and $8,150 per ASR. They received their first paid order in June 2015, and here’s what revenues look like since then.
Revenues grew quickly for the first three years, then stalled over the following three years. Knightscope is a long way off from realizing the $10 million per year in revenues that would then put them on our radar as a company with meaningful traction. If you’re going to disrupt the security industry, you need to do show you’re doing that by capturing market share which is represented by revenue growth.
Three of Knightscope’s clients make up more than 50% of their revenues, so the remaining 31 clients must be spending a lot less. That’s according to the following statement:
As of June 30, 2020, we had 23 clients and 52 machines-in-network. As of June 30, 2021, our client base grew to 34 clients, and we had 51 machines-in-network
Credit: Knightscope SEC Filing document
So, the number of clients increased by 11, yet the number of deployed machines fell by one. In the software-as-a–service (SaaS) world we refer to this as “net retention,” and it refers to the ability for clients to pay more as time goes on, not less. We want the number of deployed machines increasing always. If it’s not, that’s not a good sign. Yes, we know, The Rona caused “some existing clients to place their contracts on hold until their businesses could safely reopen.” We’d like to see contracts that are a bit more durable than that.
The math seems to add up. If we assume an average of $5,725 per month, per machine, that gives us $3,503,700 per year in run rate (12 * 51 * $5,72). We can use these numbers to estimate that Knightscope will need about 146 robots deployed before they realize meaningful revenues which we define as $10 million per annum or more.
For the 28,000 investors who have funded the company so far, let’s talk about the most important four letters that you need to be aware of right now – KSCP.
The Knightscope Stock Symbol: KSCP
We’re always amazed by how little due diligence people do when investing in companies that solicit crowdfunding dollars on Facebook. Of the top-five searches relating to Knightscope stock, two are looking for what ticker or symbol Knightscope trades under.
Knightscope doesn’t currently trade on any stock exchange, so it’s equally pointless to search for “Knightscope stock price.” Then there’s the classic search for “Knightscope stock review,” as if the people thinking about purchasing the stock are shopping for a new rain jacket. The old “what is my Knightscope stock worth” question is easy enough to answer – nothing – unless the stock starts trading on an exchange. That’s why it’s critically important for the Knightscope IPO to happen, something that they’ve been working on for several years now. The below article from IPO Edge dated July 2019 seems like deja vu.
Some might argue that the “Main Street first, Wall Street second” mantra is less about altruism, and more about not being able to convince institutional investors that this is a worthwhile investment. For retail investors, these details are irrelevant. Shares of any company are only worth what someone else is willing to pay. If there’s no buyer for your shares, they’re worth nothing.
As for valuation, that’s off the charts as you’d expect from a company with a $447 million market cap and 2020 revenues of around $3.3 million. Here’s our simple valuation ratio using the market cap at their last crowdfunding raise:
- Market capitalization / annualized revenues
$447 million / (1.78 * 2) = 125
To put that number in perspective, we wouldn’t touch a company with a simple valuation ratio over 40. For that to happen, the market cap would need to be around $142.4 million which equates to about $3.18 per share. Even then, we don’t invest in companies unless they have meaningful revenues (defined as $10 million per annum). And all that is trumped by the fact that shares are illiquid. Although we applaud the unprecedented situational awareness on offer from Knightscope robots, it’s a no from where we’re sitting. We wish the company the best of luck in helping America deal with her looting problems.
Conclusion
Illiquid investments are the bane of equity crowdfunding. Until the ticker symbol KSCP goes live on Nasdaq, shares of Knightscope are worth nothing. There is no shortage of exciting investment opportunities out there, and retail investors aren’t spoiled for choice. If you’re an existing investor in Knightscope, you better hope this IPO happens so you have some liquidity.
If you’re someone sitting on the sidelines and thinking about investing in Knightscope because you saw an ad on Facebook, just know what you’re getting into and do your own due diligence. And if you have any questions, just pop on over to their website. The Chairman and CEO of the company is happy to answer your questions.
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